What is Money Measurement Concept?
In Financial Accounting, accountants records transaction which are measurable in monetary terms. This is because, money provides a common denominator by which different kind of facts about an entity or organisation can be expressed in numerical term. This result in addition and subtraction easy.
According to Money Measurement concept in accounting, business records only those transactions which are measurable in money or monetary terms.
Money Measurement Concept Example
Suppose a business owns 1,00,000 of cash, 300 kg of raw material, 3 trucks and 20,000 square feet of land and so on. One cannot add these amount and came up with a meaningful conclusion. However if we express above items in monetary terms, then a conclusion can be made out.
Suppose business has 1 lakh cash, 50,000 of raw material, 7 lakh of trucks and 20 lakh of land. Now we can add it up and can easily find out what the business owns. In simple words, record only those transaction that re expressed in monetary terms in books of accounts.
Limitation To Money Measurement Concept
Money measurement concept has severe limitations when it comes to preparing the accounting report. Accounting does not considers qualitative factors such as disturbing relation between sales manager and production manager, ill health of CEO of the company, introduction of an innovate product by the competitor, etc.
In simple and short words, accounting does not provide a true and fair picture of what exactly is happening inside or outside the organisation. So, whoever is reading the accounting, he just focuses on the numbers of profits rather than the reasons behind it.